For example, if the crossed rental was sold at a 5 CAP
rate, and the crossed lender’s interest rate was 7%, the
borrower may choose to sell the rental and come up with
money to satisfy the lender should the lender want more
than the $325,000 net proceeds from the sale. In other
words, there are times when it makes economic sense to
come up with money in order to sell property. Another
similar scenario like this occurs when there is a blanket
loan covering multiple properties, as is the case when an
apartment building has been converted to condos and the
owner of the building desires to sell off one condo at a
time. A typical lender on the building will usually have
release prices [agreed ahead of time] under which the
lender will allow each unit to be sold and the lender takes a
specific amount [or percentage of each sale] as a paydown
of its loan.
The release price can be negotiated between borrower
and lender. Because the lender did not take the new
property alone due to the high LTV, many times the lender
will reduce its paydown to where it feels comfortable with
a specific amount of its loan on the remaining property. To
make this point clear, let’s say that the lender usually
makes loans for rental properties at an LTV of no more
than 55%. Since the new rental was purchased for
$800,000, the lender would be fine with a loan balance of
$440,000. Thus, in order for the lender’s exposure to be
reduced from its original loan of $550,000, it may be
willing to accept $110,000 from the sale of the first rental
in order for the lender to release its crossed lien. In this
case, the borrower would sell the first rental for $525,000,
pay off the first mortgage of $200,000, and pay the lender
in second position $110,000 [to release its crossed lien of
$550,000], and pocket the rest of the proceeds from the
sale [$215,000]. The borrower would keep $215,000 from
the sale, and the only debt on the second rental would be
the lender [who crossed] of $440,000.
Borrowers who overlook release prices [a specific
clause in the loan documents] risk having to ask the
crossed lender after the fact under what circumstances the
lender would be willing to release the first property. If
there is no agreement ahead of time, the borrower runs the
risk of being at the mercy of the lender, as the lender does
not have an obligation to release its lien for less than what
it is owed.
Many lenders may be willing to work out a reasonable
amount for releasing either property, as it is in the lenders
best interest to reduce the borrower’s default risk. Having
more than one property as collateral sounds good in
principle, but the added exposure of having a loan spread
out amongst more than one property may not be worth the
risk. Each situation will be different, but, as a general rule,
it is more conservative from the lender’s viewpoint to have
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